Public Bill Committee

[Sir Alan Meale in the Chair]

The Committee deliberated in private.

Examination of Witnesses

David Geale and Stefan Saldanha gave evidence.

Alan Meale: We shall now hear from the Financial Conduct Authority. May I remind Members that questions should be limited to matters in the scope of the Bill? We have to stick to the timings, which are very tight—we have less than half an hour for this group of witnesses. If I have to interrupt someone who is going on a bit, I will, so please beware. May I ask the witnesses to introduce themselves?

David Geale:  My name is David Geale. I am head of savings, investments and distribution at the Financial Conduct Authority.

Stefan Saldanha:  My name is Stefan Saldanha. I am a policy adviser in the asset management and funds policy team at the Financial Conduct Authority.

Q 3434

Shabana Mahmood: I welcome both witnesses to the Committee.
I wanted to ask your assessment of the effectiveness of clause 12 in dealing with how the alternative investment fund managers directive interacts with current partnership tax rules. Secondly, given that the directive was agreed in July 2011, why are we only now getting to this matter, which appears to have cropped up as a side issue as part of the wider consultation on partnership tax rules?

David Geale:  Perhaps I can deal with the second question first. While the directive was first proposed in 2007, it has taken some time to get to this point. We got the second set of measures only in March this year, after which we consulted ahead of implementation in July. However, the guidelines on remuneration from the European Securities and Markets Authority then came out only in September. We consulted from the FCA perspective on our own guidance around that in September with a view to putting out a policy or feedback statement in January. My answer to the second part of your question would therefore be that clarity has come late from the European Commission. Broadly, on the first part, tax is a matter for Her Majesty’s Revenue and Customs rather than the FCA but, having said that, the remuneration rules create a bit of an anomaly for the partnership set-up, and what we see looks like a logical solution to that.

Q 35

Shabana Mahmood: You said that you had your consultation in September. Did you say that January was when you are going to publish a policy statement?

David Geale:  That is correct. The closing date for responses was 6 November. We are now considering those responses and we will get a feedback statement out as soon as possible, but January is the final date.

Q 36

Anne-Marie Morris: May I ask about the process by which all this will be made effective? I understand that the Bill will be followed by provisions in next year’s Finance Bill and secondary legislation. Do you see any problem with introducing rules in that way?

David Geale:  Again, I think that that is probably a matter for HMRC, but I do not think there is any particular problem from our perspective.

Stefan Saldanha:  From our perspective, it is a matter of updating the FCA handbook, which contains all the rules applicable to FCA-authorised persons. That will be finalised, as David mentioned, in early Q1 next year.

Q 37

Anne-Marie Morris: Regarding the provisions to date, are you satisfied that we are likely to solve the problem, rather than creating an unintended consequence that allows further opportunities for tax avoidance?

David Geale:  I do not think we have seen anything to suggest that there would be further or unintended consequences, so I think we are satisfied. From the FCA’s perspective, it is a tax problem. We are happy that the remuneration guidelines can be implemented. From what we can see, it looks like this deals with the tax issue.

Q 38

Ian Swales: I know that limited liability partnerships were allowed in the wake of some well-publicised financial problems, especially for large accounting firms, but I do not think it was ever envisaged that we would see such a huge proliferation of limited liability partnerships since those issues arose. What is your comment on the number and nature of limited liability partnerships? Could you answer that question, Mr Geale?

David Geale:  Sure. We are fairly neutral on that. From an FCA perspective, we look at whether firms comply with our regulations. The structure of the firm largely does not matter in that respect. From our perspective, I do not think it matters whether a firm is set up as a limited liability partnership. The key thing is whether the firm can comply with FCA rules and requirements.

Q 39

Ian Swales: So the FCA has no comment on whether limited liability partnerships appear to be going way beyond the original intent, such as on transparency or the fact that there might be low-paid staff in an apparent limited liability partnership just to avoid employment taxes. Is it the case that the FCA has no role on such things, or any comment about them?

David Geale:  Our remit is focused on our statutory objectives, which involve consumer protection, market integrity and competition being in the interests of consumers. We would expect firms to comply with the legislation of the land, and we might have cause to have doubts about their integrity if they were not doing that. However, we are neutral on their structure, provided that they can comply with our rules and regulations.

Q 40

Ian Swales: Mr Saldanha, do you have any comments about the wider question of the sheer number and varied nature of limited liability partnerships, which seem to go way beyond the original intent?

Stefan Saldanha:  No, I do not really have a comment about that. I think that it is a matter for some other agency or regulator.

Q 41

Ian Swales: So would you agree that the current limited liability partnership rules allow imaginative avoidance of both tax and national insurance? Would you agree that that is a problem that needs addressing?

David Geale:  We are not tax experts; again, that is a matter for HMRC. In terms of whether limited liability partnerships can comply with FCA rules and regulations, yes they can, and there is no reason why that should be any different from any other structure of firm.

Q 42

Ian Swales: So you do not really have any comment on the effectiveness of the proposed changes because both of you would say that it is not your area of expertise. Am I right?

David Geale:  The issue brought up by AIFMD remuneration is about the timing or allocation of variable pay and the actual receipt of variable pay. The proposal in clause 12 seems to address that.

Q 43

Ian Swales: What about clause 13, which deals with a wider point about partners abusing the corporate form? Do you not have any comment about the use of this to avoid tax or national insurance? Would you simply recognise deferred payment as an issue?

David Geale:  We liaise regularly with HMRC and we have gateways on the information. If firms were taking steps that were breaching HMRC rules, we would consider that to the extent that it also led to their breaching any of the FCA’s rules and principles, but the tax elements would be a matter for HMRC. We expect firms to have appropriate systems and controls, and we expect them to act with integrity. If there were breaches in those particular areas, that is where we would be interested.

Q 44

Ian Swales: Was the FCA one of the organisations consulted prior to the Bill being drafted?

Stefan Saldanha:  Yes, it was.

Alan Meale: If no more Members wish to raise any questions, may I thank both witnesses on behalf of the Committee?

Examination of Witnesses

Mr David Gauke MP, John Mundy, Simon Manclark, Sarah Radford and David Edney gave evidence.

Alan Meale: For the record, Minister, would you and your colleagues introduce yourselves?

Mr Gauke:  I am David Gauke, Exchequer Secretary, and I have alongside me John Mundy, who is from the Treasury, and David Edney, Simon Manclark and Sarah Radford, who are from HMRC. Between us, we hope that we have enough expertise to cover the various aspects of the Bill.

Alan Meale: We will start the test.

Q 45

Shabana Mahmood: I thank the Minister and his officials for giving evidence to the Committee.
May I start by asking you what criteria you have set for assessing the impact of the employment allowance and, hopefully, its success?

Mr Gauke:  The first point to make about the employment allowance and its success is that it will be providing an additional £2,000 for a large number of businesses, which will use that sum in different ways. As we heard from the Federation of Small Businesses, some will focus on increasing wages, while others will focus on increasing numbers of staff, or on increasing investment in training or new equipment. I dare say that a number of businesses will do a combination of those three things. Given that it will be used in those ways, it will be difficult to identify the increase in the number of people employed as a consequence of the employment allowance, and of course many other factors in the labour market come into play when determining that. We will, however, keep the policy under review. I would look at it in terms of the general contribution towards ensuring that we have a tax climate that is good for small businesses, good for enterprise and good for creating jobs.

Q 46

Shabana Mahmood: May I press you on that? You say that you will keep the policy “under review”. I know that that is a standard phrase that is often used, but what will that mean in practice inside HMRC? Presumably there will be some criteria against which you will be measuring throughout that constant review.

Mr Gauke:  You are right that the phrase “keeping it under review” is often used, but we will continue to engage with interested parties and to discuss such matters with representatives of small businesses and Members of Parliament who, I dare say, will have views on the effectiveness or otherwise of any tax change, including the employment allowance. I am sure that any Treasury Minister would want to engage with such groups to ensure that a policy was working effectively, just as we all do with general aspects of the tax system.

Q 47

Shabana Mahmood: Have you considered carrying out a formal post-implementation review at a suitable point after the introduction of the employment allowance?

Mr Gauke:  I do not think that there is a particular case for a formal post-implementation review, which can sometimes be a somewhat bureaucratic process, but none the less we would want to make an assessment, as a Government, of take-up, of businesses’ perception of the ease of operating the employment allowance, and of the views of representative bodies, such as the FSB and the British Chambers of Commerce, about how the scheme is working. However, I do not think that it is necessary to have a formal post-implementation review.

Q 48

Shabana Mahmood: Moving on to exclusions, purely domestic employers are obviously excluded from being able to access the employment allowance, but it would appear that if a person engages a carer, nanny or gardener through that individual’s own personal service company, and the company then pays that individual a wage, the company would be eligible for the employment allowance. Is that correct?

Mr Gauke:  The first thing to ask is what the purpose of the employment allowance is. It is to help businesses, particularly small businesses, and charities. We concluded that, certainly at this stage, extending the measure to domestic staff was not something that we wanted to prioritise. It is right to say that if a nanny is employed by an agency, that agency would be able to claim the employment allowance, but just the once. As is the case for small businesses generally, that may be an incentive to take on more staff. If you were looking at a household with one nanny, it would be unlikely to take on a second nanny as a consequence of the employment allowance. That partly goes back to the rationale but, in short, if a business is employing people, they can benefit from the employment allowance. However, such agencies tend to employ more than one person.

Q 49

Shabana Mahmood: My question was less about the set-up for agencies and more about when an enterprising and highly knowledgeable nanny, or indeed her eventual employer, constructs an arrangement whereby she—or a gardener or a carer—sets up her own personal service company as a way of enabling the allowance to be claimed, rather than being directly employed by the ultimate employer.

Mr Gauke:  If you have an agency, as I have mentioned, and it is paying staff, that is fine.

Q 50

Shabana Mahmood: Yes, but what about an individual personal service company?

Mr Gauke:  But personal and managed service companies are excluded from the entitlement to the employment allowance on the secondary class 1 contributions due on deemed payments of earnings to the worker. That is of course because we do not believe that it would be right for them to benefit from a relief against contribution liabilities that arise as a result of anti-avoidance legislation. We are back into IR35 territory from there. The particular arrangement that you describe would not be caught up by this.

Q 51

Shabana Mahmood: On the connected persons exclusion, could you talk us through what you envisage happening in a situation in which there are joint ventures, mergers or franchises? I am thinking in particular of the McDonald’s example. How will those different franchises or individual franchises be treated under the Bill? Who will ultimately be able to claim the allowance?

Mr Gauke:  First, let me say that I am sure you appreciate the reasons why we have to have these rules in place—to avoid incentivising the creation, somewhat falsely, of different bodies.

Shabana Mahmood: Yes. We will take that as a given.

Mr Gauke:  I will ask Simon Manclark to address that point.

Simon Manclark:  The franchise point is that, provided that they are separate businesses and they are not connected other than by the fact that they have bought the franchise, they will be entitled to separate allowances, because they are separate businesses. That is the logic of the policy. You also mentioned mergers. There are demergers as well. To make the thing simple, we take the position at the start of the tax year and that rolls forward. If they combine during the year, both the merged firms will enjoy the allowance for the rest of the year, because it is too complicated to unravel that. Then for the next tax year they will have to decide between them which one is going to claim the allowance.

Q 52

Shabana Mahmood: So both will be able to get up to the maximum of £2,000 for the allowance in the tax year in which the merger occurs, but afterwards they have to choose one or the other.

Simon Manclark:  Correct.

Q 53

Shabana Mahmood: Okay. This question came from the evidence session this morning. It is about the different boundaries between who is and who is not eligible and the different changes that any one company might go through in the course of a tax year. What consideration has HMRC given to how those boundaries will be policed?

Simon Manclark:  On the assumption that the firms do not tell us, we will do things such as data matching. We have quite big banks of data. We would start to check and look for connections and then pursue the matter with our normal compliance policy. But I should say that we do not start from the proposition that firms are dishonest. The position we start from is that they will claim the correct level of allowance and pay the correct level of NICs.

Q 54

David Rutley: I want to move on to a different aspect of this issue. The annual relief that employers can claim under the employment allowance is capped at £2,000. What were the factors in deciding on that level?

Mr Gauke:  In terms of why it is £2,000, there is always a judgment to be made. We believe that £2,000 is a substantial sum. It would enable a firm employing four people on the national minimum wage full time not to pay employer’s national insurance contributions altogether. That is a significant sum. Or it would enable a firm to take one person on at £22,000 a year and again not pay any employer’s national insurance contributions. So we think that it is reasonably significant for smaller firms. There is also the question of what is affordable. Clearly, this comes at a cost, so we took a view on the basis of what was big enough to make a difference but was something that we could also afford.

Q 55

David Rutley: One of the things that I am very positive about on this is the impact that it might have for first-time employers—the stock of people who are self-employed has been increasing, but nudging them over into becoming first-time employers proved much more difficult across successive Governments. Is there any evidence that you have, or any indications, that this will help with that nudging process to bring more people into that category?

Mr Gauke:  Clearly, it has to contribute. You have raised a really important point—the challenge for a self-employed business person to take on their first employee is a big one. It is crossing a threshold, in a way, and there are many significant challenges in doing that—some of them real, some of them perhaps just perceived. The fact that, largely, you will be able to have an arrangement where many employers will be able to take on their first employee without running into the financial burden of paying employer’s national insurance contributions has got to be a factor that will help. It is not the whole solution, by any means, but it has got to be helpful in encouraging such people to take on their first employee. That is really important, and certainly I know there are some dramatic statistics: if every self-employed person took on one extra employee, we would not have any unemployment—or something of that sort. It would be a substantial challenge, so we can never do that, but hopefully we can encourage more people to take on that first person without the additional fiscal cost.

Q 56

Nicholas Dakin: I have a couple of questions for the Minister. First, to pick up the issue about excluding publicly funded bodies from having access, which seems perfectly sensible, what about a scenario in which a part of the business is outsourced to a new company—at what point in that process of movement from one to another is the new company eligible to claim the funding?

Mr Gauke:  It is a very good question in terms of determining what is or is not a public body. I do not know if you want to come in on that, Simon.

Simon Manclark:  If they are effectively doing the job of the public authority—if they have been outsourced—and being funded through the public purse, then they would not be eligible for the allowance, but quite often these firms have their own private business. If most of their work is for private business, they would be eligible for the allowance.

Q 57

Nicholas Dakin: So if it is a company—I do not know enough about G4S or Serco, but a company like that—that only did work that was outsourced from the public sector, it would not be eligible for the allowance.

Simon Manclark:  Yes. That would be our interpretation. The Bill says “wholly or mainly”, so if you just do a bit then it does not count.

Q 58

Nicholas Dakin: What is the bit?

Simon Manclark:  The sort of test that we would use is about half.

Nicholas Dakin: So—

Simon Manclark:  So an example could be a GP surgery, which might do a little bit of private work, such as stuff for your foreign holidays or something like that, but it is incidental to their main business.

Q 59

Nicholas Dakin: So it would need to cross the 50% threshold for them to be eligible for this allowance.

Simon Manclark:  Yes.

Q 60

Nicholas Dakin: Okay. The other thing was that I wanted to go back to the Minister and press him a little further on the criteria for success. Looking back from two years down the line, how will you judge whether this has been successful?

Mr Gauke:  It is unrealistic to think that there can be a scientific test, if you like, or that we could say if the level of unemployment is below a certain percentage—anything of that sort. We would need an understanding of what the reaction of employers is, and, as I mentioned earlier, what the take-up is likely to be, but not necessarily driven by one target. This is one aspect—a new aspect—of our tax system. It is about trying to put in place a tax system that encourages entrepreneurs, enterprise, and people willing to have a go and take people on, and so on—so, a job-creating economy. I do not think one can get too narrowly boxed into a set of a numbers, because whatever happens, this will be just one factor in determining how many jobs are created, etc.

Simon Manclark:  Could I just clarify one point in terms of your question about large companies and outsourcing? It is about providing the public service rather than contracting out some of your services, like cleaning or providing someone’s IT. That will be considered a private transaction. It is when you actually do the service or not, which is the thing we are looking at for public work.

Q 61

Julian Smith: Could I ask officials about the uptake of this scheme versus other schemes that have been proposed, and also about the admin burden in HMRC versus other schemes? There have been schemes, for example, that were going to focus on new employees of small businesses. It would be useful for the Committee to understand what the complications and challenges of those sorts of proposals versus this sort of proposal are.

Simon Manclark:  I think that we have not evaluated the admin burden of other schemes. We have based some of the stuff on our experience of previous schemes that we run. However, the key point of the employment allowance is that it is a simple scheme. There is one allowance per business or charity and it will be claimed through employers’ standard payroll processes by just ticking a box—or perhaps I should say clicking. You only have to do that once and then the claim automatically rolls over until you say. We are hoping and very much believe that the admin burden be absolutely minimal. There are no forms to fill in.

Q 62

Julian Smith: This was sort of “back of the net” for simplicity and for maximum chance of take-up in terms of all the various proposals that are being made.

Simon Manclark:  Yes, and to do it via an electronic channel, rather than old-fashioned paper and pencil.

Q 63

Julian Smith: Could I also ask, perhaps in my ignorance, how, if I am business with Sage or another package, the process will work? How will I take advantage of this brilliant idea?

Simon Manclark:  It is up to a company such as Sage how it designs its software, but we have published a technical specification—how we would expect a claim—and the software companies are busily designing that. We talk to software providers—the providers forum—and they have been relatively comfortable with the specification we have given them. How they lay it out is up to them, but they would have to claim as part of what is called the employment payment summary. The design ingenuity is part of the success of that commercial product.

Q 64

Julian Smith: On communication more generally—this came up this morning—I was hearing from my colleague to my right, my hon. Friend the Member for Macclesfield, about a video that HMRC produced about taking on a new employee. I think it has only had 300 hits in a month. The video is really good. It is really helpful, and I re-emphasise the point that I made this morning: I think HMRC has the keys to the communication gatehouse in terms of companies, and I would urge you to look at that particular example and at other examples. Presumably, with modern communications, if I go to HMRC and say I am employing a new person, there should be some way of telling me, if I have one employee, about all the other Governments policies or opportunities for that sort of situation.

Simon Manclark:  As part of the spending review, we were given some money to develop digital exemplars. One of the things we are developing at the moment is “Tax for My Business”, which is to get all the different parts of your tax obligations in one place without having to trawl vast amounts of content. Although the roll-out for that is slightly further away than April, your point is well made.

Mr Gauke:  If I may, I will add to that. I think you raise a really important point. One of the things that we and HMRC are very focused on is how increasingly it can be used as a communication channel with businesses. You are right to say that there are some very good training videos available on the HMRC website, but increasingly I hope that there will be the opportunity to develop targeted messages to send to those businesses who really need them and a way of easily communicating with businesses through HMRC’s link.
When we get to the point where every business has a personalised account that it can go to—a little bit like an online bank account—that could be the forum through which messages could be sent if we want to highlight a particular Government scheme or particular information. We are not there yet, but that is a big focus of what HMRC is doing and I hope that, increasingly over time, the Government can use HMRC as a way of communicating with businesses.

Q 65

Julian Smith: There seems to be a reticence from either HMRC or other Departments to cross-sell, to use the commercial jargon.

Mr Gauke:  To be fair, I do not think it is a reticence in terms of Departments not talking to each other. In truth, HMRC is moving towards having the capability of doing this properly, but until recently it has not really been in the position to do that. It has not worked through communicating by e-mails for security reasons and so on, but as time goes on and some of the digital products are developed, an important part of some of the announcements we have made at recent fiscal events, spending reviews and so on has been on developing HMRC’s digital capability so that it can do that. As that capability increases, HMRC will be able to publicise information that is relevant not only to it, but to other parts of Government.

John Mundy:  Could I make just one point in response to the original question on take-up? One of the key things to remember is that the employment allowance is a permanent, not temporary, allowance. The fact that it is here to stay will mean that, over time, businesses will become increasingly able to engage with it, understand it and take it up, rather than having to react to temporary schemes.

Julian Smith: I pay tribute to the Minister, who I understand has listened to many MPs across all parties who have championed the small business and business cause. I think that this, along with the lowering of corporation tax, is one of the biggest fiscal messages we can send to business. The Government have done that.

Q 66

Chris Evans: We all like the idea of tax simplification, but it is interesting to look at the Bill in terms of oil and gas workers. That is a fish that has been slippery for a number of years. The previous Government tried to resolve the issue of multi-layered contracts 10 years ago, which resulted in the wholly unsatisfactory IR35 regulations. Will the Minister talk through the process? I know that this is one stage of three: the certification system is coming in. Knowing how complicated oil and gas employment contracts are—offshore and onshore are all inter-related—how do you think that the Bill can reduce the tax avoidance that is, unfortunately, prevalent in the industry?

Mr Gauke:  First, you raise a good point in terms of the discussions we have about tax simplification. Very often, tax complexity is in truth driven by the complexity of the behaviour of taxpayers, or people we would like to be taxpayers. There is a long-standing issue with oil and gas and ensuring that the right amount of tax is paid here.
I would like to ask Sarah Radford from HMRC to say a word or two on some of the more technical points, if I may.

Sarah Radford:  We have spoken quite widely with the oil and gas industry to find a scheme that will work for them in such a way that there will be no choice but to pay the tax. The way that the certification works is that the licensee of the oil field, who must be present in the UK because of the legislation on holding a licence, is made a secondary contributor. That way we always have someone in the UK to pay the tax in the case of very complex arrangements being set up so that the employer is outside the UK and outside our jurisdiction to collect the tax revenue. We think that it will be really quite successful. We know that quite a lot of the big oil and gas licensees are already looking to change their contracts to ensure that the companies with which they engage and that are operating on the United Kingdom continental shelf either have a certificate in place or have a UK associated company. That way, there will always be that link back so that we get all the NICs.

Q 67

Chris Evans: I appreciate what you are saying and I appreciate that it is a very complicated issue. However, my concern is whether you think changing the tax regime would have any effect on the competitiveness of British oil and gas companies.

Sarah Radford:  From what we have been told, many of them have it in their baseline already. The cost of getting oil out of the UKCS is quite large, but the proportion that relates to the people on oil rigs is fairly small. A lot of the oil licensees have told us that they have been trying to get it into their baselines for all the costings for a number of years because they do not want to be involved in tax avoidance.

Q 68

Chris Evans: This is probably a question for the Minister. I obviously do not want to pre-empt what the Government are going to do, but I know that this initiative is part of a three-part package. Forgive me if I am out of order for straying from the content of the Bill, Sir Alan, because obviously this issue will have to be dealt with in secondary legislation, but do you think, Minister, that this is an opportunity to reform the IR35 regulations? I know that in the past the Government have said that they have not been minded to abolish them because of the consequences of further tax avoidance, but it seems that every part of industry has major concerns about IR35. In some ways, are we on a direction of travel that would see the end of those regulations?

Mr Gauke:  The Bill is very much focused on the oil and gas industry. There are particular factors that relate to oil and gas and the measures operate narrowly within those circumstances. IR35 is a different set of circumstances. It comes back to the broad question of employment relationships and so on, but it is a different matter, so if your hopes are that the Bill is the first step towards the end of IR35, I would not encourage you.

Q 69

Chris Evans: Perhaps I could explain where that question comes from. I do see some overlap, because oil and gas companies are taking advantage of IR35. That is what I was driving at really; I was not looking for a definite answer.

Mr Gauke:  Even if we go down that path and attempt to deal with issues relating to intermediaries and so on, there remains an issue that IR35 addresses, so I would not necessarily run into that because the circumstances are slightly different. Perhaps Sarah wants to say a word on that.

Chris Evans: I was going to say; I can see her writing.

Sarah Radford:  The situation we are trying to tackle is when employers set up outside the UK. The employment relationship may be traditional with an employee, but the employer is outside the UK and the tax jurisdiction. The way that is set up, specifically with the UK continental shelf, sometimes means that they are outside employer NICs.
IR35 looks at when someone has set up their own company and is working through that company. What would be an employment relationship if that company was not there and you ignored it and just looked at the relationship between the worker and the end client is very different from what we are trying to tackle in the oil and gas sector.
Part of the measure looks wider than the oil and gas industry, but again people would be deemed to be employees of employment businesses outside the UK. It is about people locating outside the EU and the UK to sidestep our legislation even though the workers are working in the UK for UK companies.

Q 70

Chris Evans: What would happen if a worker set up an offshore company to funnel their wages through? Would they need certification as well?

Sarah Radford:  If they were employees or were deemed to be employees of that offshore company, yes they would for the oil and gas industry.

Chris Evans: Thank you.

Q 71

Ian Swales: Chris Evans has asked a lot of what I was going to ask. Can I add another point about transparency to employees of what is going on? I have many offshore workers in my constituency and I have had constituents coming to see me shocked that they do not have the pension they were expecting because they did not realise they were not properly in the system. In the communication that people receive annually, they hear a lot about tax, but they are not told what their national insurance position is unless they request it. Has HMRC considered giving clarity to people about their national insurance position on a more regular basis?

Mr Gauke:  You raise an important point in the context of this legislation. There can be circumstances in which people do not realise that they are not making contributions, and they consequently lose benefits. There is a point about trying to address some of the issues involving national insurance contributions.
On your wider point about increasing awareness, I would link it into an earlier conversation with Mr Smith about communication—in that context it was with businesses—with individuals and how can we be much more transparent with individuals about the tax they pay, where that money is being spent, and their contributions. That could all come together. The Government have announced that we will send personal tax statements to the majority of taxpayers. They will be able to see the income tax they pay and the employee’s national insurance contributions they pay.
There is a case—I don’t know whether this is the forum to discuss it at length, and I suspect that it is not—for saying that as we make further use of digital technology, for example, people should have personal tax accounts, a bit like online bank accounts, which could be the place where you provide a lot of information about the tax that people have paid and the national insurance contributions that have been made so that they can see what their rights are.

Q 72

Ian Swales: It would be a cross-check. People could have missed odd weeks and, as a result of the curious way the system works, lost a whole year of entitlement. Communication is important and it would help to have a supporting mechanism as part of the measures you have been speaking about.

Mr Gauke:  I agree. To do this well and effectively requires some long-term planning, but there is an opportunity as we become more sophisticated users of digital technology to give taxpayers and members of the public more information about the taxes they pay and the contributions they have made so that they can see exactly where they stand.

Q 73

Anne-Marie Morris: I have three short questions for you, Minister. First, as you know, I am a great supporter of the employment allowance. It is a fantastic initiative and one of the best things the Government have done. However, as you also know I am a great advocate of simplicity. My concern is about the exclusions for those who should not benefit. I am concerned that we are making a rod for our own back. As I understand it, we are trying to make sure that people do not circumvent IR35. Secondly, we are trying to ensure that this does not apply when we are talking about taxpayer-funded businesses. Both of those measures seem to me to make sense.
If, however, we are trying to achieve that by identifying particular sectors—in this case, the domestic sector—it seems to me that we will be opening a Pandora’s box. People will ask, “What is domestic?” All sorts of opportunities will be opened up for unintended tax avoidance. You said earlier that if someone employed a nanny, they would not employ another one. Perhaps what you are really talking about, therefore, is the purpose of the business, but if you are talking about purpose, we will have to go into community interest companies or a whole bundle of different organisations that do or do not make a profit, but are really there for a social purpose and not to make profit. I suspect that that is a box that would be better left unopened. If we could find some wording that simply dealt with the problem of IR35, we might be better off.
In the public sector, avoiding giving out a benefit that is taxpayers’ money is absolutely the right course of action. The challenge is with the many businesses these days that are combined private-public sector bodies—joint ventures. It is not as simple as when a body is 100% funded by the Government or the taxpayer in some way. That is fine; those bodies are in a separate category and the provisions do not apply. But Mr Manclark’s response was, “Well, we think it may be 50%.” I can think of so many ways of getting around that, and I can imagine the Government changing the percentage each year. It seems to me that it would be much simpler to specify public bodies as any body whose primary, principal purpose is to serve the public. It can be a local authority, or a county council—we have to decide whether to include local enterprise partnerships, for example. That would avoid what I can see as a mess going forward. That is my first question.

Mr Gauke:  The first point I would make is that we have to put this in a little bit of context. If you are talking about large organisations that provide some services to the public sector and some to the private sector, I think it is unlikely that they are going to be motivated to come up with any particularly contrived structure as a consequence of a £2,000 employment allowance. We have to remember that £2,000 makes a lot of difference to a lot of businesses, but a larger business is not going to change its behaviour to benefit from this.
We have to go back to what the purpose of the employment allowance is. It is designed to help economic growth by supporting businesses, particularly small businesses and charities. For that reason, we did not include domestic staff. If we had, I would probably have had to declare an interest as we employ a nanny in the Gauke house—but that was not particularly what drove us here. The desire is really to focus efforts on smaller businesses.
It is unlikely that you would run into many grey areas. There is a clear line between what is domestic employment what is a business more generally. We can maintain that line without there being any particular complication. As we heard this morning from the Federation of Small Businesses and as Simon Manclark has made clear, the process for a business to claim is very easy and simple. The circumstances in which HMRC will be having to man the borders, if you like—looking carefully at particular cases to see whether a business falls on one side of the line or the other—are likely to be relatively limited. I do not know whether there is anything that Simon wants to add to that.

Simon Manclark:  A 100% boundary is actually harder to police. Somebody will easily contrive a little bit extra to put them on the other side. Hundreds are more difficult than the phrase we have in the Bill of “wholly or mainly”.

Q 74

Anne-Marie Morris: Thank you. I have two further questions. One relates to how this is to operate in practice. When I asked a question this morning of the FSB they said they would effectively like the £2,000 as soon as possible, and therefore as soon as we get to that trigger point. It may be that the Government are thinking of tranches over a 12-month period. Are you able to explain to us how that might work in practice?

Mr Gauke:  It will be the first £2,000. Some employers will get it in the first month. Some will get it over subsequent months until the first £2,000 has been reached.

Q 75

Anne-Marie Morris: Will the real-time information implementation affect how easy it will be to make this work in practice?

Mr Gauke:Yes. It is because of RTI that we are able to implement this, we believe, relatively easily. I will let Simon come in in a moment. Because the PAYE system has been updated—the most significant improvement to the PAYE system since it was introduced in 1944—the operation of the employment allowance by HMRC does not require vast numbers of HMRC officials going through lots of paperwork. It is much easier both for the employer to claim and for HMRC to administer. RTI is one reason why that is the case.

Simon Manclark:  As the Minister said, it will be programmed into RTI. While the employers claim via part of the process, we will expect the first £2,000 of employer’s NICs to be NICs-free. The computer at our end will properly reconcile with the normal employer’s return. That is work that we are doing at the moment.

Q 76

Anne-Marie Morris: My third and final question. Given that, to some extent, the Bill has been used to tidy up some of the challenges with national insurance, I wonder why we did not look at class 2. I suspect that an awful lot of time at the Treasury is spent on the self-employed who do not realise that they have to pay class 2 and class 4. Class 4, I am sure, is where the biggest tax take is; class 2 just seems to be a strange thing to continue. I am surprised that such a change is not included in this tidying-up Bill.

Mr Gauke:I suppose that I should take that as a representation. We obviously look at these things from time to time, and I appreciate the point that you make about class 2, but a simple abolition would have a cost. It is also worth pointing out that we have carried out a consultation, which finished last month, on how we administer the various classes of national insurance for the self-employed. We are constantly looking at ways to improve the administration of the tax system, including in this area.

Q 77

Richard Fuller: The Committee’s brief tells us that national insurance contributions paid to the Exchequer amount to £102 billion, which is slightly below the revenue from income tax at £152 billion, while £101 billion is raised from VAT, so this is a very large tax. I believe from the brief—I am not an expert—that employers pay just under 60% of that amount from NICs. Does that not seem like an awfully heavy tax to levy on employment when we have 2 million people looking for work?

Mr Gauke:I take your point. You will be aware, Mr Fuller, that when the Government came to office, we inherited plans to increase that even further. We reversed an element of that by increasing the thresholds at which employer’s national insurance contributions are paid, and we are now implementing the reform of the employment allowance. We have taken action to try to reduce that as much as possible in a climate in which we are borrowing considerable sums of money and cannot afford to borrow more. I think that the challenge, as a Treasury Minister, is that while one can point at a large number of taxes and make the point, “Wouldn’t it be nice if they could be lower?”, and it is difficult to disagree with that, we have to reduce the level of borrowing and we need to fund public services.

Q 78

Richard Fuller: I agree with you. I was happy to campaign against the jobs tax in 2010, and the employment allowance seems to be an excellent way of reducing the tax. It is so good, in fact, that I can see it winning converts around the table even as you speak, Minister. However, you talked about the fact that we are dealing with a massive overhang of national debt and a crippling deficit, albeit one that has come down over the past couple of years, so difficult choices and trade-offs have to be made when looking at particular tax changes. We are entering a period where lots of politicians will dangle different types of tax changes and try to pressure the Exchequer into saying whether they are good ideas. This idea seems very good for employment and wages, but how would you contrast it with other tax changes that could be made? Is it the best way for us to give some money back to the hard-pressed taxpayer?

Mr Gauke:  The first point I should make, if I am going to continue to use Treasury clichés, is that all decisions are for the Chancellor to announce at Budgets and autumn statements. To step back, different taxes have different effects on the economy. As a Government, we have demonstrated that we believe that we have to be very competitive on corporation tax, and we have cut the rates there. We recognised that a 50p rate of income tax at the top end put us in an uncompetitive position and did not raise revenue—at least not in significant sums—so we have taken measures there.
I highlight, as I did a moment or so ago, that this is the second permanent tax cut in terms of employer’s NICs that we have undertaken. In the context of wanting to encourage employment—we have a good record on that as a Government, although we would like to go further—this measure is a good step to take. There is also the point that different taxes have different benefits, so if you want more investment, corporation tax is a good tax to cut, while if you want more employment, employer’s national insurance contributions are a good tax to cut. As we both recognise, however, we are in the context of a difficult fiscal climate. It would have been pleasant to inherit public finances in a stronger state, but we did not have that luxury.

Q 79

Richard Fuller: One final question on HMRC. One aspect of this cut is that it is permanent and not a one-off change for one year that might modify behaviour. There have been one-off incentives to change corporations’ behaviour or to encourage them to do something differently. Can HMRC provide any analysis of how effective one-off inducements are compared with a change that is understood to be permanent?

Simon Manclark:  I do not think that we have done a general piece of work on that, but your proposition must be right. The more permanent the scheme, the more likely it is to have a greater, more enduring effect compared with a temporary scheme.

Q 80

Richard Fuller: I do not want to put too much work on you, because you are already hard-pressed. However, you say that you have not done such research, but it would be help the Committee’s deliberations if HMRC could carry out some analysis on the impact of recent one-off or temporary changes compared with that of longer-term changes. We are trying to change behaviour. We have heard from the Federation of Small Businesses that there will be some change, and that is right, because the measure is permanent. We should be able to contrast that with just giving someone a one-year rebate. That might be helpful.

Mr Gauke:  I very much acknowledge the point that you are making about the advantages of permanent over temporary, although there are times when any Government will want to make use of temporary measures, given pressures on public finances or specific issues that have to be dealt with at a particular time within the economic cycle. I mentioned the difficulty of having a detailed set of criteria by which to judge the employment allowance, and one of the reasons why is that there is a lot going on in the economy. That may depend on all sorts of factors—a number of Government policies, the general economic climate and so on.
In terms of a detailed evaluation over the years of the effectiveness of temporary policies versus those that are permanent, to be fair to HMRC or the Treasury, it would be difficult to come up with anything terribly conclusive. However, one can accept the point that when we can do something that is permanent, as we have done with the employment allowance, that is more likely to be beneficial than a short-term policy.

Q 81

Nick de Bois: Minister, has any assessment been made of how businesses will use this? Did you assess how many will wish to expand employment as a result of it and how many will use it to invest in their businesses in other ways? I know the FSB has done some work, but I wondered whether your Department had.

Mr Gauke:  We have not done work beyond what the FSB has done. As you say, the FSB has set out the percentages. If I recall correctly, Mr de Bois, you cited them in an intervention on Second Reading.

Nick de Bois: Your memory is clearly on form.

Mr Gauke:  Thank you very much.
There is a balance between increasing wages, increasing numbers of staff or investing within the business, whether that is for training or capital and so on. As you know, the FSB surveys suggest sizeable numbers for all those categories. It is difficult to make an assessment beyond surveys, and the FSB is well placed to carry that out, but it stands to reason that such a policy will result in expenditure of that type. Economists tend to think that, over time, these things feed through into wages going up, but clearly there is significant survey and anecdotal data to suggest that there will be businesses that take on staff as a consequence. Coming back to my earlier answer to Mr Rutley, the fact that this makes things easier for start-up businesses, or other businesses taking on their first employee, is also likely to be a factor.

Q 82

Nick de Bois: It may be that we will rely on evidence from organisations other than the Treasury in future. Just picking up on what my hon. Friend the Member for Bedford said, could I ask you about the sustainability of this? I know you cannot predict what will be in the next Budget but, for example, is introducing this measure the beginning of a sustained long-term attack on the cost of employment? In that sense, is the general intention that it will at least be protected by salary inflation in the future? Is this a sustained attack on a tax that is not very useful, except in terms of the amount of money you see from it, and will you, as a minimum, seek to sustain its value?

Mr Gauke:  The Bill brings in a £2,000 employment allowance. We have not put an automatic uprating mechanism in the Bill because, to return to the issue of simplicity, there is something symbolic and simple about a £2,000 employment allowance. If the amount a year later is £2,174, I suppose in theory and in practice that that is very nice for employers, but it is helpful to have something eye-catching and simple to explain to businesses. Of course, Governments will want to keep it under review.
I noted the remarks made by Mike Cherry this morning that the FSB will campaign for the £2,000 to become £3,000, £4,000, £5,000 and £10,000. I should confess that when I spoke to Mr Cherry on the afternoon of the 2013 Budget, I made the point that we had given him and the FSB something to lobby on with every Budget for ever more, and I am happy to stand behind that prediction. Of course this will be kept under review, but we think that £2,000 is a good and fairly significant number with which to start the process, and then it is a matter of seeing how it goes. No doubt the feedback that we get from employers will feed through to future Budget decisions.

Alan Meale: Minister, we are rapidly drawing to a conclusion, but we will have one last question in this sitting.

Q 83

Shabana Mahmood: On clause 13, I am trying to understand the impact of the disapplication of section 4(4) of the Limited Liability Partnerships Act 2000. Is the intention basically to ignore the special tax status of LLPs and to consider them as bodies corporate so that their members are treated as office holders of that body corporate and are therefore deemed to be employed earners for tax purposes, or is it to revert to the definitions used in the Social Security Contributions and Benefits Act 1992 for an “employed earner” and a “self-employed earner”?

Mr Gauke:  I am always wary of the Columbo question—the “and finally”. Section 4(4) of the Limited Liability Partnerships Act 2000 provides that, generally, a member of an LLP should not be regarded as an employee for any purposes. The Bill will remove that requirement. When members of an LLP satisfy certain conditions, they will be treated as if they were employees of the LLP, and the LLP will be treated as their employer for the purposes of employment taxes—PAYE and NICs. That will be done through existing NICs legislation that permits the self-employed to be categorised as employees.
The other point I would make is that the Bill should be considered in conjunction with what will be put in place in next year’s Finance Bill. Both sets of measures will address the issue of LLPs. The Finance Bill will deal with the income tax element and this Bill deals with the NICs element to try to ensure that the LLP arrangement delivers on the original intention when LLPs were introduced, so that people who are essentially employees are treated as such for income tax and NICs purposes. We believe that it is right that that is addressed.

Alan Meale: That brings us to the end of this sitting. Thank you, Minister, and the other witnesses on behalf of the Committee.

Ordered, That further consideration be now adjourned. —(Amber Rudd.)

Adjourned till Thursday 21 November at half-past Eleven o’clock.